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"We need to watch our global competitors in regard to regulating the housing market. In March this year the China Daily called for the housing market to be regulated to control prices. If China does this,  it will enable Chinese workers to continue to be able to afford to work for lower wages and as a consequence for China to maintain its competitive price advantage over UK industry."

 There is despair across our nation at the cost of providing a home.  Our society depends on people doing a variety of work, much of it traditionally low paid but important nevertheless. We expect people to work for modest salaries from shop work to health care and much in between and yet somehow find a home they can afford.  

Increasingly people are being unable to achieve this and are forced to consider trying to move to less expensive areas or pursue money-driven rather than vocational career paths. 

From those that remain for example in the public sector can we realistically continue to expect to get the best from them if they are left to fend for themselves in a wilderness of low quality and expensive housing market forces are creating. Something has to change. 

House prices are controlled by the price mechanism based on supply and demand,  influenced by regulation. The supply of land is finite and we further restrict the supply of housing by regulations such as the Green belt and planning laws so we should manage the effects of high demand by not allowing it to push prices every upwards.

 Demand is increased by rising incomes or both partners working, cuts in mortgage rates and lifestyle with people wanting to live on their own.  

The problem is that if income rise, prices rise and people are back to square one. If mortgages become cheaper or are provided say by Mutuals people may not always benefit because this may be snatched away through a commensurate rise in prices. So how can people get ahead? 

The best way to significantly ratchet up the standard of living of people in this country is to break into this cycle and put the brakes on rising housing costs through regulating the house price mechanism, directly and indirectly by managing factors that influence it. This would enable incomes to rise without people been penalised by rising prices. 

No one is immune from the consequences of rampant house price inflation. Among the first to suffer from house price inflation are those living in expensive housing areas who lack key workers forced out by high house prices, they have illusory wealth, capital that is only released on sale of their property, and vanishes again when the person buys another home.  

The house price surge has infected most of the UK so freeing this capital by relocation to distant parts is less of an option. 

Some feel that importing migrant labour is the answer to filling vacancies in key services but taking key workers from any country is both unethical and a short-term strategy because once here as soon as they can, they are bound to join the exodus to less expensive areas. Also an increasing population increases demand. 

The children of the affluent suburbs and friends of people living there usually also have to move far away. This means that they cannot, even if they wanted to care for aging parents and the State has to take responsibility.  

Regulation needs to return to the rental market as well. Rent controls, scrapped in 1988-99 as a way of solving homelessness by encouraging people to rent out properties has caused the cost of housing benefit to quadruple to £12 Billion a year as landlords realise that they can charge what they like in the knowledge at the end of the day the state will pay. This has been totally abused and has distorted the price mechanism. The states intervention in the market has made life even harder for low wage earners not eligible for social housing.

 A return to controlling rents for a start could save £billions a year in housing benefit subsidies. Even the social housing world to their shame has jumped on the band wagon of market rents paid for by housing benefit. Most agree subsidy to should be in the property not the individual. 

We could increase supply by allowing communities to charge higher council taxes to discourage second homes. But cutting interest rates as currently mooted by the Bank of England would increase demand and hence prices so back to square one.  

Also if housing is regulated wage demands can be moderated as people will be better off even if working for less and this will boost our countryís global competitive position. 

Research by the FT way back in 1986 has shown house prices feed wages and wages feed house prices thus increasing costs for industry making it less competitive. 

We need to watch our global competitors in regard to regulating the housing market. In March this year the China Daily called for the housing market to be regulated to control prices. If China does this,  it will enable Chinese workers to continue to be able to afford to work for lower wages and as a consequence for China to maintain its competitive price advantage over UK industry. 


China Daily)
Updated: 2005-03-31 08:48


How House Prices Fuel Wage Rises

John Muellbauer
Financial Times
23 October 1986

SPIU Briefing Sheet 6: Paying for HousingOctober 1998

Article 2    How the housing market could be regulated directly and indirectly

 Following the case for regulating the house price mechanism, many might agree but might ask if it can actually be done? 

Following the article for regulating the house price mechanism to curb skyrocketing house price inflation may I suggest the different ways it may be achieved. House prices can be influenced by direct government measures or indirectly by intervening in the factors that influence price including supply and demand. As it runs counter to the myth that people can increase their prosperity  from a rising market it might be harder to persuade people to accept direct controls on the sale price of homes and allocation in a static market price-wise by housing points as well as income,  However re-introducing immediate direct regulation of the rented sector might be politically easier.

If the state is re-intervening in the market by regulating rents it could be argued that it might need to meet the shortfall in income for an agreed time. Rent controls would save billions in housing benefit and those needing to rent would see their real standard of living rise markedly. Those who see property as a pension option could be persuaded that cheaper homes will cut worker costs boosting industry and hence the stock market. The Government would also need to revert to 100% start up grants for housing associations from the current 60%. Lower rents encourage more to work and not claim housing benefit and research has shown this would overall save the government money.

Supply of local authority housing can be maintained by scrapping right to buy and increased perhaps by radical ideas such as allowing people to leave their properties to the council in return for housing rights for their children or people they nominate. Maybe all land should revert to the state on death. This would increase supply. Perhaps the council could rent properties and let them at subsidised rents.The social housing world should be extend its role to help all those who cannot afford to purchase a home including lower paid workers and students.

The fastest way to gain some sort of control over the price of housing may be by indirect measures and strategies as convincing the nation to accept direct regulation will take time.Indirect measure might include higher council taxes for second properties which would reduce demand, increasing the supply of houses which would lead to a fall in prices.

We might consider the ethics of owning a second home and perhaps in time the case could be made for a ban on owning more than one property.

The supply of housing over demand can be increased reducing prices by building upwards, downwards (from basements in private homes to underground cities) or on water with floating cities. High rise living might succeed with a radical overhaul of design with for example gardens and communal spaces built on all levels and tight management. Residents make slums not design.

Supply should not be increased by destroying our countryside or by exporting our problem. 

Higher concentrations of houses on land are possible if socially and practically public transport becomes first choice and car parking spaces are not required.

Anything that discourages people from keeping properties empty or speeds up the sale of homes or letting of properties can marginally increase supply.   

Demand for housing might be reduced by communities for single people with considerable social and financial advantages. People are generally only presented with the option of living on their own. There is no national programme that I know of organised shared living for people of different ages and backgrounds. Iím thinking of everyone, not just for specialised groups.  

Communities need to be designed with space and privacy in mind allowing time alone combined with central meeting places. It would need to be expertly managed by highly trained specialists, principally psychologists who know how people fit with each other, putting the group together and intervening where necessary. Friends or any group might get together and asked to be housed in their own community.  

Short-term small therapeutic communities for newly single people from bereavement, separation or recovering from illness could help. 

Attempts to offer single people shared accommodation often fail because lettings teams lack the aptitude and qualifications needed.  Current so-called communities run by social housing providers are more like warehouses. A community should have around 6-8 people not hundreds. Currently in what passes for community living people are thrown together and anyone living near such places knows what the result is; bedlam. 

Existing tools that dampen the speculative nature of home ownership include capital gains tax and stamp duty although ideally, regulation would not need to take money away from people. Investing in any organisation or strategy that reduces relationship breakdowns or the fragmentation of families can reduce the demand for alternative accommodation.   The amount of money available to drive up house prices can be reduced by restricting mortgages according to income and by inheritance taxes, although demand for rented accommodation would increase proportionately. 

Much of this debate impinges on perceived notions of individual freedom. What right does the state to intervene in our lives? Although it does so already, including the housing market but not in a way that controls prices. Real freedom is where people are not enslaved by factors beyond their control. The current free for all in housing means that is the survival generally of the financially strongest. We all suffer as a result. Direct and indirect regulation would tame this jungle.


Briefing Note: Housing & regulation May 2006

 The media seem awash with programmes about making money out of property and the Government is to introduce measures that will further inflate house price inflation and encourage ownership of second homes. Local people particularly in areas like Yorkshire find it nigh on impossible to purchase a first home. 

"housing costs are directly linked to costs to industry as people have to earn more if the cost of living rises, making UK industry less competitive."  One of the articles I will send you discusses how a debate in China to regulate house prices there could affect our competitive position. 

Society needs people to variety of jobs, many of whom are vital but relatively poorly paid. Such people cannot compete in an unregulated housing market against people from outside who may be in much higher paid (though not necessarily as useful) jobs.In the first article I try to put the reasons for regulating house prices and in the second suggest ways it might be done. For instance from the second article

I suggest"Indirect measure might include higher council taxes for second properties which would reduce demand, increasing the supply of houses which would lead to a fall in prices.  

We might consider the ethics of owning a second home and perhaps in time the case could be made for a ban on owning more than one property."

Below I try to give a background to the general idea of regulation.

I hope this idea will interest you and that you might consider using the articles. as a basis for a story. They should find a resonance with the public. 

Regulation as a free fiscal tool available to Government: 23.2.06

Background to the use of Regulation to help our communities

A couple of months ago the news featured story on house prices and a Devon village where the actions of the villagers to restrict purchase and re-purchase of the affordable homes to local people is perhaps an act of regulation, which is a free fiscal tool available to government.

And I think one of the Exmoor National Park is trying something similar.

On a wider scale regulation might be the way to control skyrocketing house price inflation. Direct regulation on house prices might be difficult to introduce (although it could be reintroduced in the rental market where it existed up to 1989) but indirect levers on house prices might be more acceptable and could used to cool the market. 

And I feel in light of recent government proposals to encourage investment in property as part of pension provision it might be topical to not only warn of the disadvantages of this but also of the great benefits our economy and society would get from cooling the market through some form of regulation, direct and indirect. 

This is the subject of two articles I have written. I will email them to you, following this email and wonder if might use the articles themselves or whether the idea of regulating the housing market might be something you or your colleagues could cover in the future. 

The media has been running with the housing market recently. One featured calls for an interest rate cut to stimulate the housing market and mentioned the controversial self-invested personal pension scheme that would see residential properties been used as part of pension provision.

I think this is a huge mistake not so much because of the lost revenue to the Exchequer but because it will further inflate the housing market and housing costs are directly linked to costs to industry as people have to earn more if the cost of living rises, making UK industry less competitive. Essentially countries overseas are increasingly able to undercut us because their cost of living is much lower. And the biggest cost to anyone is the cost of providing a home. Far from boosting house prices the government should be trying to bring them under control. House price inflation harms our economy and UK industry as well as harming our the social fabric of our communities. 

Peoples pension funds would be boosted by a rising stock market and this could be achieved by radically reining in house costs not the reverse. It seems the government is pushing things the other way. Also if people were able to spend less on housing it would boost consumer spending.  

Eventually whatever any government does the whole pyramid like structure of over inflated house prices will come crashing down ie they will run out of ideas or money to sustain it although perhaps it will not occur on their watch. 

It would also be helpful for our economy and peoples pensions for the government to encourage people to invest in industry not offer them attractive short-term alternatives speculating in housing. 

I have a background in housing and have written these two articles that explore the idea of regulation,  in this case the advantages of regulating the housing market. In the first article I try to make the case for house price regulation and in the second I explore how it might actually be done, directly and indirectly. 

Regulation is both an overused and underused free fiscal tool that the government has. Overused because in some cases there is too much red tape. Various forms of token monitoring required by government departments sometimes achieves less than it should and can waste a lot of time while providing a fig leaf and mislead, suggesting sometimes consumers are content with something or are listened to when in fact  in reality they may not be and bad practice may be present (ie an example of this may be the numerous so-called tenant participation initiatives in social housing giving the illusion  more than substance perhaps to inclusion and accountability between tenants and social housing departments) . Badly designed forms for police require hours to complete. Perhaps these need to be trimmed.  

So any regulation can carry a cost. It needs to be well designed and carefully thought out.  

However there is an ingenuity about regulation that in some cases can bring great benefits to the community 

 Regulation already abounds, regulating the quality of food sold as just one example has made the nation much healthier. It does not carry a financial cost to government which I see as one of its strengths  . Governments do not have to own the factors of production but they can regulate them. 

Just a few examples of potential regulation to illustrate the point might be say around the issue of improving the protection of the environment.  

For example if the government regulated the amount of packaging a product could have, companies in theory would be happy because they would be on the same level playing field as their competitors. (Industry would need given a reasonable lead in to such changes). They would invest more in their design teams to produce attractive packaging based more on good design and ideas rather than sheer mass of packaging material. This would save raw materials and save on disposal and landfills later down the line.  

Another example might be recycling paper. There is some resistance to using it because recycled paper can appear to be a bit muddy and less attractive to consumers. Say however the government regulated that new printing dyes needed to be used that were easier to wash out this would lead to cleaner recycled paper which would be more attractive.

Or if a 30year old idea was brought back that plastic containers had to bio-degrade in time ie in sunlight then this would also help our environment.

The whole concept of how regulation could help the world might be something that could fire readers imaginations. Iím sure the ideas are out there and they could really develop and extend the concept and its application in their own areas of life and expertise.

Regulation is as old as the hills and can in this case I believe help tackle house price inflation that is slowly strangling our communities and our economy.  

There are a lot of vested interests who will cry foul but in light of the new government proposals to further inflate the housing market perhaps it is reasonable for an alternative scenario for the future direction of the housing market price-wise to be mooted.


(China Daily)
Updated: 2005-03-31 08:48

It is time for the government to intervene in the redhot housing market, otherwise it runs the risk of spiralling out of control. For many would-be urban home buyers, their dream of owning a home continues to disappear as house prices surge nationwide. Some economists attribute the surging prices to inadequate supply in the market, arguing that prices will fall as supply increases.

 This is in line with classic economic theory that says that in a competitive market, as supply goes up prices usually go down.  However, as a special commodity, such a rule may not work in the housing market in China.

 Housing is not a consumer good, but an investment, a feature that makes its price-setting mechanism markedly different from other commodities. There exists no price equilibrium in the investment goods market. The price of such a good is usually decided by its expected returns.

Housing is a quasi-public good and has a social dimension. The government is usually responsible for providing public goods.

In China, sweeping urbanization in recent years has led to an explosion in the urban population and a severe shortage of housing in many cities.

In order to solve these problems, the government has to step into the property market because housing development and other public infrastructure projects are part of the government's overall planning strategy.

 The negative effects resulting from real estate developers' market segmentation strategy is another reason why the government needs to intervene in the housing market.

 Market segmentation is a strategy used by enterprises to tailor their products to different consumers or different market layers in order to maximize returns.

Low-income group's low purchasing power often leads them to be ignored by the market, which tends to favour high-income groups. This is the case in the housing market. In order to guarantee low-income families' housing needs, the government should provide them with low-rent homes, economy housing or set up a housing security system. In this sense, the government's intervention in the housing market would not only better optimize social resources, but also be conducive to achieving social justice.

 The current housing market also makes government intervention a pressing task. The property market has witnessed four consecutive years of sizzling growth since 2001. Investment has risen sharply and, despite soaring prices, housing sales are also brisk.

In many cities, the amount of housing sold is more than the housing that is being built, lowering the vacancy rate.

But neither investment or sales volume should be used as a reference point to judge whether the housing sector is overheating, nor should the gap between demand and supply be similarly used.

Unlike ordinary commodities, housing usually involves huge amounts of credit, both for developers and for home buyers.

The current brisk house sales and good returns does not necessarily mean ultimate returns will be as good.

The current boom will spur developers to build more homes which may exceed future demand in the market, resulting in a glut.

So individuals and developers could end up with a huge amount of bad bank loans.

 For the property industry, the growth of urban residents' disposable income should serve as the reference point when making building decisions.

If this growth of disposable income and the amount of housing available are not parallel, it could mean the real estate industry is not sustainable, or that spending on house buying is affecting other forms of consumption.

This is what is happening in the country now. 

House prices in some cities such as Beijing, Shanghai and Hangzhou have shot up wildly to a degree that they are now way beyond ordinary people's reach.

 This is a phenomenon that should be taken seriously.

According to the National Bureau of Statistics (NBS), urban residents' disposable income grew annually by 10 per cent on average from 2000 to 2003. House sales increased annually by 30 per cent on average during the same period.

In 2003, total house spending as a portion of total urban residents' disposable income amounted to 16.7 per cent, a figure that was higher than America's in 1999, which was 13.65 per cent.

If there is not prompt and powerful government intervention, a serious housing bubble will be in the making. And exorbitant, rising house prices will worsen the lives of those newly settled in our cities. 

  • But what should the government do?

  • It is recommended that a special body should be set up to handle the public housing issue.

  • One model is the Hong Kong Home Authority, a quasi-official agency which is responsible for determining and implementing public housing programmes.

  • A similar body could be tasked to protect low-income groups when the government's economic development target is at odds with the public housing system.


  • The government could consider the following immediate measures:

  • A high rate of tax could be levied on house buying to curb property speculation.

  • A house market information network should be set up.

  • A transparent information system could effectively prevent the market from being manipulated by some players.

  • The government's policy on tightening land management should be strictly followed to the letter.

  • The government should increase the supply of public housing for low-income groups.

How House Prices Fuel Wage Rises

John Muellbauer
Financial Times
23 October 1986



One of the great puzzles of the UK economy is why, despite massive increases in unemployment, an apparent transformation of the industrial relations scene and an environment of global disinflation, wage inflation remains so high.

Our recent research(*) on wages finds the housing market to be centrally implicated in the inflationary process; I suspect that the housing market is as important as the deficiencies of the UK's labour market institutions and its system of training and education in explaining the country's relatively poor post-war economic performance. We now appear again to have embarked on a spiral of domestic inflation in which house prices feed wages and wages feed house prices. Worries about the exchange rate in the inflationary process have been exaggerated.

There are three chief mechanisms by which house prices affect wage settlements. First, house prices are an actual or prospective elements of the cost of living for those buying or about to buy a house, even if this is not reflected in the Retail Price Index. Second and perhaps even more important is the effect on house prices on labour mobility. When house prices rise, those in the more prosperous areas lead. This makes it more expensive for those in less prosperous areas to move and increases the mis-match between unemployed people and unfilled job vacancies. Lastly, it may be that house price inflation in excess of retail price inflation is a cause of increased inflationary expectations. It could also conceivably be merely a symptom, in which case conclusions drawn here are overstated.

We have built upon the well-known Layard-Nickell real wage model for annual data to provide the empirical evidence. Included in Stephen Nickell's latest version of this model, the real new house price of two years ago and a regional house price difference both weighted by the proportion of owner occupiers, shows both effects to be strong and stable over time.

According to our estimates, the forces that pushed up real house prices and regional differentials in the last three years have added, or will add, about 4 per cent to real wages and, because of feedbacks, much more than that to nominal wage inflation into 1986. Preliminary work with quarterly data confirms an average lag of two years, though some of the effects occur in the first year.

To explain why house prices are not an ingredient in the wage equations of any of the major macromodels, I suggest first the surprisingly long lag of their effect; second, the rapid feedback from earnings to house prices, demonstrated by the econometrician David Hendry, makes confusion between lagging house prices and earnings easy; third, wage equations have not usually included the theoretical sophistications of Layard-Nickell, and finally, in the past, with a lower proportion of owner-occupiers, house prices were less important.

Probably the single most important reason for recent rapid house price increases has been the disappearance in about 1981 of mortgage interest rationing. The housing market may be the major channel by which the money supply influences inflation directly rather than via interest rates. If this is so, it is ironic that, at the very time the monetarist cure for inflation was being most strongly implemented, the mechanisms effectively to control mortgage credit were being dismantled.

More fundamentally, there can be no doubt of the central role in house price inflation of mortgage interest tax relief, which has helped to guarantee real rates of return that, over the years, have overshadowed those on other assets. Given the effect of house prices feeding back into earnings, there was a potential tinderbox which again and again threatened to ignite. In the past, the lid was kept on by mortgage rationing, incomes policy and sometimes by high interest rates. In the 1980s, the lid had been high interest rates and increasing unemployment.

Let us consider the correct policy response. It should not be deflation through higher interest rates. The conventional view is that raising interest rates slows inflation by strengthening sterling, thus reducing import costs and cutting demand for goods. To these must be added the effect via the housing market. However, our empirical research reveals significant offsets. First, cutbacks in production, which reduce labour utilisation, increase unit costs and prices. Second, sudden shocks, whether positive or negative, result in additional hiring or firing costs and these get passed on to prices. All three are reasons to avoid Stop-Go macroeconomic policies.

There are other , more long-term limitations on the effectiveness of deflation, whether policy-induced or not.

Deflation eventually reduces the effective supply of labour and of productive capacity so that, when demand picks up, inflationary pressure is more likely.

The political arguments against higher interest rates and higher unemployment are even stronger than they were. Given the Government's commitment to wider share ownership, it could be disastrous for electoral prospects if in the next few months, interest rates have to be jacked up, producing capital loses for many new investors and reducing the cash flows of owner-occupiers.

Instead, the correct policy response should begin with the urgent repetition of the recent warning on mortgage lending by the Governor of the Bank of England. But the fundamental aim must be to re-set the tax signals which are at the core of the problems of house price inflation, now much exacerbated by the continuing liberalisation of housing finance. Capital gains tax could be extended to main residences and the "Schedule A" tax on imputed rent reintroduced. A good economic case can be made for these. Simper would be the announcement of a phased withdrawal, over three years perhaps of mortgage interest tax relief with a politically advisable compensating reduction in the standard rate of income tax. The opposition parties would no doubt incorporate egalitarian elements in such a reform. But it seems virtually certain that if the basic element of this proposal were adopted by the Government, they would swiftly include similar proposals in their platforms.

Consider the consequences if such a package succeeded over the next year or two in rolling back the average level of nominal house prices to, say, that prevailing in 1984-85. It would impart a major deflationary impulse to the UK economy but one bearing largely on prices, rather than activity.

Wage inflation would fall, lower interest rates would be possible, not only because of the reduction in inflation but because of reduced levels of credit demand. Consumer borrowing, base don housing collateral, which is destined to increase further with the new freedoms of building societies, would fall or grow more slowly bringing down the growth in monetary aggregates and in the volume of imported consumer goods.

House and land prices would fall by more than the average in London and the South-East where the speculative excess has been greatest. This would improve the conditions for regional mobility, make the labour market more efficient and reduce a source of inflationary pressure. An additional benefit would be that the rental market in housing would become relatively more attractive and better supplied. Moreover, conditions of falling house prices provide the ideal moment to reform legislation in the rented sector. Reform in the past has been stifled by the rent increases that would have resulted from liberalisation.

Who loses and who gains? The paper capital losses of owner occupiers are obvious but, for many, cash flows would improve. Those with holdings of gilts and equities would benefit from the appreciation made possible by falling interest rates. New buyers should benefit greatly and, since as an age group, many have been battered by unemployment, high interest rates and high house prices, that seems fair. The worst affected would be incautious lenders to the housing market; their capital time as does their interest income.

There are two other policy options facing the Government. One is the re-introduction of mortgage rationing but this now looks feasible. The other is an incomes policy of the Layard type that would operate through taxes on companies and which I favour as an additional weapon in the campaign against inflation.

Optimists will argue that basic reform is unnecessary: there are indications that house price increases are slowing; the CBI data suggests a slight fall of wage settlements in manufacturing; the August trade deficit was a statistical aberration; the adjustment of house prices and consumer debt to a new equilibrium after the removal of rationing in 1981 is almost complete and the new non-inflationary equilibrium is just around the corner. There may be something in all of these ideas. But the financial markets have become doubtful about the fundamentals and I now share their doubts.

If my analysis is correct, the present tax treatment of owner-occupancy threatens not only future growth and employment, but through the Government's commitment to stock market values, its own election prospects. For once, political advantage and a statesperson-like concern for the unemployed and the future of the British economy coincide.

(*) Research for this article was undertaken with Olympia Bover.


Last updated: 6 April 2000. 
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